Managing Risk in Construction Contracts

1. Managing Risk in Construction Contracts Brendan D. Bowles Glaholt LLP

2. Standard Contracts: Pros

3. Standard Contracts: Cons Banfai � �Tyranny of the Precedent� � slavish, unthinking use of precedent undermines the deal Standard form rarely is an exact match of the actual business deal and project requirements Standard forms should be revised to ensure: (a) Responsibilities of each party clearly identified (b) Risk is properly allocated

4. Fundamental Risks: Design � Bid � Build (Traditional Project Delivery)

5. Fundamental Risks � Construction Management Owner has direct liability to trades and suppliers, multiple entities responsible to owner for design and construction More contracts might equal more confusion CM is typically owner�s agent � scope of authority needs to be clearly defined and understood so no surprises

6. Fundamental Risks � Design-Build Single entity responsible for both design and construction Difficult to precisely define the scope of the design-builder�s obligations until design complete Fixed price risky because price cannot be precisely determined until design complete. As a result design-builder builds in price contingencies.

7. Other Key Risks

8. The Emerging Risk � Green Construction �Green construction is planning and managing a construction project in accordance with the contract documents in order to minimize the impact of the construction process on the environment.� Glavinich, Contractor�s Guide to Green Building Construction (Hoboken: Wiley & Sons, Inc., 2008)

9. Green Building: �A building that provides the specified building performance requirements while minimizing disturbance to and improving the functioning of local, regional, and global ecosystems both during and after its construction and specified service life.� American Society of Testing and Materials (ASTM) Standard E2114-06a

10. History of Green Building Movement 1970: U.S. Environmental Protection Agency established 1987: Brundtland Report 1989: American Institute of Architects (AIA) establishes its committee on the Environment 1992: UN Conference on Sustainable Development UK Green Building Rating System 1993: AIA and International Union of Architects Joint Declaration of Interdependence for a Sustainable Future US Green Building Council established 1994: AIA Environmental Resources Guide

11. History of Green Building Movement 1998: US Green Building Council issues LEED Version 1.0 2000: LEED 2.0 2002: LEED 2.1 2002: Canada Green Building Council established (modelled on USGBC)

12. Risks in the Green Building Project General principles apply equally to green building projects: Risk retention Risk reduction Risk transfer Risk avoidance

13. Risks in the Green Building Project Increased liabilities: Use of non-standard materials and systems Increased risk of failure of such materials and systems Failure of one integrated specialty can snowball into failure of multiple related specialties Contractual responsibility for achieving LEED certification

14. Risks in the Green Building Project Reduced risks: Air quality and mould litigation are unlikely, since green buildings tend to have exceptional air quality Green projects are less vulnerable to energy price and water costs increases Green projects tend to be more self-reliant (more natural light, internal water and energy generation) and therefore less vulnerable to power disruptions

15. Risks in the Green Building Project Reduced risks: Every single step in a green building project must be meticulously documented, for example, to meet LEED requirements Potential for error is reduced, as is the potential for disputes that arise because of insufficient documentation Liability issues are more readily determined

16. LEED: Leadership in Energy and Environmental Design LEED is: A method of measuring A voluntary rating system used during the building design process to set environmental and human health protection goals A third-party certification process confirms the project�s achievement of the design goals by reviewing documentation collected during the design and construction process A certain number of points must be achieved to meet certification standards

17. LEED: How does it work? Owner decides that the project will be a green project Owner registers its intent to have the project certified with the CaGBC Registration gives the design team access to technical guidance by independent LEED experts LEED scoring system consists of 7 prerequisites and 70 elective credits Prerequisites have no points associated with them, but must be achieved to earn point in the associated category

18. LEED: How does it work? Different Rating Systems: new construction MURB (multi-unit residential building) campus and multiple buildings commercial interiors core and shell existing buildings neighbourhood developments

19. Clauses for Owners to Review with Special Care �Constructor� responsibility for health and safety in Construction Management projects Dispute Resolution Limitation of Liability Financial Disclosure

20. Clauses for General Contractors to Review with Special Care LEED documentation requirements Actually a Construction Manager at risk? Changes in the Work � documentation of changes, impact on schedule and cost Exclusion Clauses in Bid Documents � Tercon case from B.C. heading to Supreme Court of Canada

21. Clauses for Subcontractors to Review with Special Care �Pay if paid� or �pay when paid� clauses Incorporation of the terms and conditions of the Prime Contract into the Subcontract Priority of Contract Documents CM as Agent? Who is the contract with? Might affect lien rights and availability of a payment bond